In all companies, a correct pricing strategy is the basis for success, which is why companies should dedicate more and more resources to finding the right price for their products and services.
Small and medium-sized companies often define their pricing by considering only their production costs and applying a mark-up on these costs that represents their margin. This methodology, in a highly competitive and volatile market, is overly simplistic and ineffective, but it is still the most widely used, especially in small businesses that do not have a team or contact person for pricing and revenue management activities.
On the other hand, this strategy always allows to have a positive marginality, but only in very rare cases is it able to lead the company to maximize profits; in fact, the price should not be based on costs but on customer’s propensity to consume.
Pricing: the main strategies
Companies, in order to try to satisfy the market demand of their customers, very often try to differentiate their offers using different logic. We have listed the most common strategies below:
- Pricing differentiated by time: a technique widely used in the tourism sector. A classic example is last-minute offers in which the price is drastically reduced in the vicinity of the event. Another type of this strategy is the so-called “Early Bird” purchases in which discounts are granted as the advance purchase date increases.
- Differentiated pricing by geographic area: here too the aim is to maximise revenue. A school example is car rental or shipping services, with different pricing according to delivery locations.
- Differentiated pricing according to customer characteristics: the most classic cases falling into this category are discounts granted to children under a certain age or senior discounts over 65. It is differentiated on the basis of a characteristic by trying to identify a well-defined customer cluster with a specific price elasticity or spending capacity.
- Differentiated pricing by a characteristic of the offer: an example that is often used is the distinction of classes when talking about a train or plane trip. The customer’s need, in this case for example travel from Rome to Milan, is satisfied regardless of class, but it is the characteristics and service details that differentiate the offer.
- Differentiated pricing by quantity: in this case, discounts are made in an increasing manner only on the basis of the quantity purchased. These are generally volume discounts to entice the customer to increase the order at the expense of a few percentage points of marginality.
Pricing, in medio (and in data science) stat virtus
These are just some of the possible pricing strategies, and they can also be used in combination, further increasing the possibility of really meeting customers’ propensity to consume. With this in mind, it is also important to mention bundling policies that are implemented to structure offers on a wider basket of goods by reducing the unit cost of each product.
There is no one-size-fits-all strategy for all companies, but each must invest in identifying the right pricing strategy for their business and customers. With this in mind, over the last few years, an ever-increasing amount of data available to companies and the use of AI techniques have led to the development of increasingly refined pricing models based on the propensity to consume of the demand, using pricing that is increasingly dynamic and dependent on exogenous variables and intrinsic to the company.